Bankrupt Jefferson County Says Creditors Need to Revise Plan

By Martin Z. Braun -
Aug 26, 2013

Jefferson County, Alabama, said it
may offer sewer-system creditors new bonds at “much lower”
principal amounts if they fail to revise a bankruptcy exit plan
that’s threatened by rising interest rates.

Without concessions, creditors -- including JPMorgan Chase
& Co, hedge funds and bond insurers -- won’t get cash for the $3
billion in debt they hold, Ken Klee, the county’s bankruptcy
attorney, said in an interview in New York. Instead, they would
have to accept a debt exchange and have bankruptcy expenses paid
out of sewer revenue, reducing the amount available for
repayment, he said.

“The county has gone as far as we can go,” Klee said.
“Either there will be concessions or we’ll have to go to a
different kind of plan.”

On June 5, Jefferson County reached an agreement to pay its
largest creditors $1.84 billion, or 60 percent of what they’re
owed. Since then, interest rates on top-rated 30-year municipal
bonds have jumped by 1.3 percentage points to 4.67 percent,
according to data compiled by Bloomberg. At current rates, the
county could refinance only $1.5 billion to $1.6 billion of
sewer debt, Klee said.

The deal called for the county to raise sewer rates 7.4
percent annually for four years and then 3.49 percent a year
thereafter. That plan provided a cushion for an interest-rate
increase of 0.5 percentage point.

Thirty-One Cents

Under the deal, hedge funds, which are owed about $872
million, would receive more than 80 cents on the dollar while
bond insurers including Assured Guaranty Ltd. would collect $165
million out of $315 million in claims. JPMorgan, the biggest
bondholder, would get $375 million of the $1.22 billion it is
owed, or 31 cents on the dollar.

As interest rates were driven up by Detroit’s bankruptcy
and concern about the Federal Reserve curbing bond purchases,
county officials voted to increase sewer rates to 7.9 percent
annually in years two through four. They are also planning to
increase the base user fee by $5 on Oct. 3, which would raise
another $8 million annually.

Justin Perras, a JPMorgan spokesman, declined to comment.
Ashweeta Durani, a spokeswoman for Assured Guaranty, didn’t
immediately respond to a request for comment.

Jefferson County commissioners were in New York for
preliminary meetings with rating companies that will grade a
refinancing managed by Citigroup Inc. (C) The new sewer debt, which
will have gross revenue of 1.25 times available to make interest
and principal payments, should garner a AA rating, said
Commissioner Jimmie Stephens. Future rate increases will be
enforced by court order.

Broken Instrument

“This commission took a broken debt instrument and
repaired, it,” said Stephens.

Proceeds of the refinancing would be also be used to pay
for 10 years of water and sewer capital expenditures, including
about $170 million that the county needs to spend to reduce
phosphorous discharges into the Cahaba River under a U.S.
Environmental Protection Agency consent decree, Klee said.

Under the terms of the “base plan” approved by the
commission last month, the county planned to issue a mix of
three different securities.

The county projected issuing about $1.3 billion of new
debt, paying interest on a periodic basis at a yield of 5.75
percent, according to documents filed with the bankruptcy court.
Another $327 million of zero-coupon bonds will be issued at 6.75
percent along with $286 million of zero-coupon bonds that
convert to a security that pays interest on a periodic basis,
according to documents filed with the court.

Balloon Payments

Some critics, including University of Alabama finance
professor Robert Brooks, said the use of zero-coupon bonds only
pushes the biggest debt-service payments into the future, much
like a balloon mortgage.

The county has since reduced the amount of zero-coupon
bonds to $180 million and the convertible securities to about
$460 million, Klee said.

A $2 billion refinancing using only bonds that pay interest
on a periodic basis would require sewer rate increases of 25
percent in each of the first four years, which would be unfair
to ratepayers, county officials said.

The case is In re Jefferson County, 11-bk-05736, U.S.
Bankruptcy Court, Northern District of Alabama (Birmingham).